GLOBAL - Real estate lending should be more strictly regulated if it helps avert a further property slump, University of Cambridge's Colin Lizieri has argued.
Speaking at yesterday's IP Real Estate Investor Forum in London, the Grosvenor professor for real estate finance questioned whether it was necessarily bad if increased regulation made borrowing more costly.
He said investors had forgotten about the inherent risk of borrowing during the boom years.
Giving the seminar's keynote lecture, Lizieri, also a member of the Investment Property Forum's research committee, questioned investors who pursued a City of London-only strategy, calculating that a 30-year buy-and-hold strategy would have fared almost a third worse than a more diversified approach.
"In the boom phase, investors forgot about the inherent risk of borrowing," Lizieri said. "The belief in the ability to time the market to get out was deeply embedded, which, combined with easy access to credit, very, very generous loans and the mis-pricing of risk by the managers, contributed significantly to the end result."
During his lecture - entitled 'We are going to Hell in a Handcart' - the professor also challenged attendees over resistance to a more tightly regulated lending market.
"Is that really a bad thing?" he asked. "Given that we've just gone through a hideous crisis with rapidly falling capital values and all the refinancing problems, wouldn't a little bit of more conservative regulation of lending be a good thing for the real estate industry, not a bad thing?"
He conceded he would often be branded a "doom-monger", joking he had predicted five of the last two property crashes, but he was adamant that the problem did not lie with the real estate investment fundamentals, but with the investment approaches chosen by some investors.
He noted that, even in times of supposedly negative returns, property remained viable, as these returns are only realised if a sale is required.
"That's obviously going to cause a problem for short life funds, for funds with high leverage that have to refinance - but that should also make us reassess whether those are suitable instruments for real estate investment," he said.
"Real estate fundamental investment characteristics are sound as long as we revert back to a way of thinking that isn't dominated by short-term capital growth.
"The emphasis on cash-flow management and risk management is important, a reduced emphasis on growth, leveraging and financial engineering."
However, the former Henley Business School lecturer also emphasised the need for a diversified investment approach - calculating that a buy-and-hold investment in City of London offices would have left the owner 30% worse off than if he had simply considered a UK diversified approach.
Lizieri also praised the "heroic attempt" by DTZ to gather data on the funding gap facing European real estate - with current estimates at more than $180bn (€140bn) - given his belief that as much as £114bn of current loans could no longer be refinanced on those terms.